This Just In: More Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock-pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Today, analysts are cheering earnings at Riverbed Technology (NAS: RVBD) and taking another look at Intuitive Surgical's (NAS: ISRG) quarter as well -- electing to upgrade both. They're considerably less optimistic about RF Micro Devices (NAS: RFMD) , though. Let's find out a bit more now, beginning with Riverbed.


What goes down must come up
It's been a rough few months for Riverbed Technology's long-suffering investors, who watched in horror as their formerly highflying stock shed more than half its value between last quarter's earnings report and this quarter's. What a difference a quarter makes!

The good-news drought finally came to an end this morning, when Riverbed announced Q2 results that were much more along the lines of what its shareholders (used to) expect. Sales that were up 17% and earnings that were 57% higher than last year's both beat analyst estimates handily. Add in a couple of analyst upgrades from Mizuho and RBC Capital Markets, and what do you get? A 26% jump in share price, that's what (as -- ahem -- predicted).

But now the question arises: After the surge, are Riverbed shares still a bargain?

Actually, they are. They may not be as great a bargain as they were, say, 24 hours ago. But with Riverbed generating $175 million in positive free cash flow over the past year, the company's current market cap still works out to a price-to-free-cash-flow ratio of just under 17. That's cheap relative to 22% long-term growth expectations. Long story short, Riverbed still has room to run, and to back that statement up, I'm sticking with my "outperform" rating on the stock on Motley Fool CAPS (which is now beating the market by 8 percentage points -- thanks for asking).

Trust your intuition
Robotic-surgery specialist Intuitive Surgical didn't get hurt quite so badly by earnings last week as Riverbed did last quarter, but the 14% sell-down from $550 still had to hurt. The good news, though, is that this sell-off has given new investors an attractive entry point into the stock -- or so says Mizuho, which is bargain hunting this stock as well. This morning, Mizuho took a second look at the company's Q2 performance and declared it good enough for a "buy" rating. Mizuho thinks Intuitive could easily sell for $540 within a year, which seems intuitively obvious, given that the stock fetched even more than that just prior to earnings.

The only problem with this statement, though, is the unfortunate fact that Intuitive has not yet gotten as beaten up as Riverbed did, so it hasn't yet gotten as cheap as Riverbed was. Now priced at 29 times free cash flow, Intuitive still has analysts expecting "only" 20% annual profit growth over the next five years.

Now don't get me wrong. I actually like Intuitive. In stark contrast to fellow robo-docs Hansen Medical (NAS: HNSN) and MAKO Surgical (NAS: MAKO) , both of which I've panned in the past for their inability to create enough cash to fund their own businesses, Intuitive does a great job of generating excess cash profits for its shareholders. And personally, I'd happily pay 20 times free cash for a business this good. I wouldn't even wait for a "cheap" price; a "fair" price would be fine. But Intuitive isn't either of those. At 29 times free cash, it's still overpriced. My advice: Don't follow Mizuho's advice on this one. It's right about Intuitive in the long term, but it's buying too soon.

What's the frequency, Kenneth?
Rounding out our trio of ratings moves is RF Micro Devices, which reported a loss last night and warned of weak earnings in the current quarter. The stock's getting crushed in today's trading, down 17%, and downgrades from Northland Securities and UBS aren't helping matters much. Northland pegs RF Micro at $4.50 and thinks you should hold the shares for a rebound to that level. UBS, however, has lost patience with the stock. The Swiss mega-banker predicts that RF will continue to fall, hitting $3.25 within a year. UBS's advice? Sell now to avoid any more pain.

I won't beat around the bush here: Northland is right, and UBS is wrong.

Why? One year ago, RF Micro was reporting profits but burning cash. But today the reverse is true. The company just reported a $19.1 million loss. But in contrast to last year's fiscal Q1, in which the company burned a small amount of cash, RF has turned things around and generated positive free cash flow of $6.6 million for the quarter. Combine that with three more free-cash-flow-positive quarters preceding this one, and RF looks to be on the right track to me. It has $86 million in free cash generated over the past year, which puts the stock at a price-to-free-cash-flow ratio of less than 12 -- plenty cheap for the 13%-plus long-term earnings growth that Wall Street projects for it.

Long story short, RF Micro may not be my favorite stock in tech. (I actually prefer the tech wunderkind described in the Fool's recent report on "The Next Trillion Dollar Revolution" -- read it today for free.) But its price is more than fair. I'd even go so far as to call it cheap. It's certainly not so overpriced as to require selling it, and UBS is wrong -- and late! -- when it tells you to do so.

 Whose advice should you take -- mine, or that of "professional" analysts like Mizuho, Northland, and UBS?Check out my track record on Motley Fool CAPS, andcompare it to theirs. Decide for yourself whom to believe.

The article This Just In: More Upgrades and Downgrades originally appeared on Fool.com.

Fool contributorRich Smithdoes not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 330 out of more than 180,000 members.The Fool has adisclosure policyThe Motley Fool owns shares of Intuitive Surgical, MAKO Surgical, and Riverbed Technology.Motley Fool newsletter serviceshave recommended buying shares of Riverbed Technology, MAKO Surgical, and Intuitive Surgical.Motley Fool newsletter serviceshave recommended creating a stock position in Riverbed Technology. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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